Signatories of the United Nations Principles for Responsible Investment (UNPRI) – now one of the world’s largest investor initiatives with more than $14 trillion in assets – gather today (June 17) in Seoul, South Korea, for their annual progress conference. Donald Macdonald, chair of the PRI, whose tenure runs for another year, says holding the event in Asia is symbolic of a major reshaping of the global investment nexus: “In some ways, it is an indication and recognition by institutional investors that the economic geography of the world is shifting east. I see two big drivers for investors. The first is this move eastwards in terms of the production of goods and increasingly the development of finance. The second is climate change, and within that, issues of energy supply, water, food and waste. Institutions globally need to be aware of what these factors will mean for investments. There is also much new awareness on these questions from participants in emerging markets. The reason we are meeting in Seoul is to provide a framework for this debate. UNEPFI (The United Nations Environment Programme Finance Initiative) and the Global Compact are holding concurrentevents and we can tap into the important work they are doing.”
Macdonald says he would be surprised if commodities and the debate over soaring global food and oil prices is not high in signatories’ minds at today’s event: “It’s a very sensitive issue. It’s not absolutely clear to most people what is happening with institutional investment in commodities, hence pension funds in the US recently giving evidence to a Congressional committee. Demand is phenomenal, but it’s difficult to work out how investment plays in the equation: do commodity stock prices dictate the prices of commodity futures or the reverse? How much oil is there and who has it? Many pension funds, including the BT scheme (£38bn UK pension fund), of which I’m a board member, didn’t invest in commodities for high alpha but for long-term results, diversification and low correlation with equities. The problem is that if you look at the sub-prime meltdown, almost no-one saw that coming. The worry for investors and citizens is that in the very volatile area of global energy and the provision of food, for god’s sake, there’s a huge strategic and moral issue we need to get a hang on.”
Macdonald is keen to point out though that the PRI is not in the business of making statements on global investment and politics: “I’d be surprised if we started drawing up policies, but we do encourage signatories to examine these questions, take positions and collaborate on working for change.” Nonetheless, he says that if the resources can be found, a lot of PRI signatories would be interested in having a commodities ‘workstream’. If so, it would fit into the more difficult boxes such as discussions with the hedge fund, private equity and real estate sectors that the PRI has instigated. The organisation recently held an exploratory meeting with private equity managers in New York, which Macdonald says kicks-off a process that has generated “a lot of interest” over how these sectors can be allied with the principles of integrating environmental, social and governance (ESG) criteria into investment. In-roads into these sectors could add to the already spectacular growth in PRI signatories among more mainstream asset owners and asset managers under Macdonald’s watch: more than 360 signed up so far and rising monthly. Yet, he says recruitment is not as big a priority for the PRI as properly developing the capacity for signatories to deal with ESG integration: “Each organisation starts with a different background. We’ve spent much of our time trying to provide signatories with examples of best and relevant practices where they exist. Our priority is to improve the way we operate as a discussion forum and networking facilitator to make this a reality rather than just an ambition. We believe recruitment will rise because there is a much bigger response from the mainstream to move into this space and asset owners are increasingly putting pressure on asset managers to do so.”In Seoul, PRI signatories will discuss the 2008 assessment process, which consists of annual member responses to a detailed questionnaire outlining where progress has been made on meeting the six PRI principles. Some signatories argue that the PRI must show it is not just a ‘box-ticking’ exercise for investors to avoid criticism levelled at its corporate forerunner, the Global Compact.
“I’d be surprised if we started drawing up policies.”
Macdonald says the PRI knows it needs to be “quantifiable”. To this end, a verification element to the assessment has been added where Mercer, the investment consultant that collects and processes the data on behalf of the PRI, took a sample of responses and carried out a telephone interview to talk through how they were formulated. “There was also a greater level of objectivity to the questions than in the first year. We are still learning how to do this, but this year’s process is much more rigorous. It’s unrealistic to think it’s ever going to be perfect, but it will become more sophisticated as we progress,” he says. In addition, Macdonald hopes other schemes will follow the example of the BT pension scheme, one of a few that has published its PRI ‘score’ – a tally of the responses measured against a best practice benchmark – on its website: “We were happy to have it published, with explanatory context, despite some of the assessments showing us in a rather unflattering light! It identified areas where we could improve reporting and we have taken on board these weaknesses. The feedback from
other signatories is that they find the process equally positive and have improved as a result.” He says the PRI is aspirational, however, not an annual exam: “There may not be dramatic successes, but it is a tool for improvement of the members by which we too can assess our own effectiveness as an organisation.” In Macdonald’s view, this internal measure of success as an “investor initiative” is more important than the PRI being in the public eye. As an example, he cites, the UNPRI Clearing House, the private investor collaboration site, which he says has given institutional investors “real opportunities” to have a collective impact inengaging on ESG issues with companies, outside of the glare of publicity. Other areas, he says the PRI will build on in the coming year include a network of global academics in the ESG field where the PRI provides real-time investor case studies in exchange for expert input: “It’s remarkable really when you think that PRI was only introduced two years ago. Without the skill and dedication of James Gifford in London and Jerome Taggart in New York (executive director and project manager of the PRI respectively) we wouldn’t be half way to where we are now. The key now is timing and pace. You can’t move too quickly if you want to move purposefully.”